The Power of Open Source for Business

Stephen O'Grady at RedMonk has launched a new Podcast called Hark. In his second episode, he and Agile programming guru Kent Beck have a thoughtful discussion around the ideas in O'Grady's book "The Software Paradox." Even though software is "eating the world" and become more widespread and strategic, its economic value appears to be declining rapidly. Certainly, we've seen a shift in the industry from traditional on-premise software commercialization to distribution models like open source, and software-as-a-service, with vastly different business models.

Simply put, the software industry is undergoing a significant disruption that is reshaping the economics of the industry and rendering older "tried and true" business models obsolete. And at a level that strikes closer to home for many, it's also reshaping employment models and careers. Although the parallels are not perfect, the software industry is going through a transformation much like the publishing industry or the music industry. (And we all know how well that turned out for writers and musicians!)

I would argue this has transformation has been going on for at least ten years already since the emergence of successful open source companies. In the early days of MySQL, Marten Mickos regularly talked about how his goal was to disrupt the database industry taking it from $9 billion in revenue to $3 billion, and then capturing a third of that. While this was possibly more bravado than business plan, it was based on the fact that MySQL was 90% cheaper than Oracle. (And for many, MySQL was 100% cheaper --after all, it was under a GPL license and free for most users.)

While we built a solid business with MySQL, growing it to just short of $100m in revenue and selling it to Sun for $1 billion cash in 2008, the long term impact of MySQL was far higher outside the database industry. MySQL, Linux and other open source infrastructure software spawned thousands of businesses that simply would not have been economically possible under traditional commercial licensing fees. We routinely met founders of companies that said their business was enabled in part because of the dramatically lower cost of building an IT infrastructure. So at least some of the value that MySQL disrupted was captured not by traditional software companies, but by newer companies like Facebook, Google, Skype, Craigslist, Priceline and the like. And many of those businesses also happened to be disruptive, which is why software is eating the world.

Not surprisingly, there have been very few home runs in the open source business, at least as measured by revenues or exits. Red Hat, JBoss, Pentaho have all been successful as businesses and have had good payouts for their investors. But many more open source projects have had widespread popularity with remarkably little economic value generated. And that is precisely the nature of the Paradox.

And as Mickos has recently noted "The bad news is: it's almost impossible to make money on open source. The good news: it has happened many times." But at this point it's hard to say what the future successful models for software commercialization might be, but it's certainly not going to be the traditional on-premise up-front license model. And I don't think open source, in all its various forms, is likely to generate a large number of economic home runs. There are definitely a handful of promising companies like Acquia, CloudEra, DataStax, MuleSoft, PuppetLabs, SugarCRM and the like, but they may be more the exception than the rule. (If I missed other rapidly growing open source companies, let me know in the comments below.)

Likely we will see more divergence over time with more value realized in other forms, whether it's service-based models, cloud-based businesses, advertising, data aggregation or perhaps something as-of-yet to be invented.

It's a fascinating topic with more questions than answers at this point. And I'm sure we'll see more discussion on this topic at the Monktoberfest conference in October.

The Hark podcast is available on iTunes, SoundCloud or wherever you get your downloads.

My former boss, Marten Mickos, has created an excellent new resources for early stage founders, managers and execs called www.Schoolofherring.com. Each post has a short write up and often a 2-3 minute video covering a topic such as giving feedback, Peter Drucker's principles of good management, what it takes to build an effective team, hiring for strength etc. Some of these topics are very practical, like how to send good email, others are more thought-provoking, such as the notion that bad news is good news --one of my personal favorites.

Some of these ideas come from legendary management guru Peter Drucker, but they are all shaped with Marten's unique and practical experience.

Dealing with churn, is one of the most important elements of building a subscription business. While some churn is inevitable over time, too much churn indicates a more fundamental problem: customers aren't finding value in your product.

I wrote an article over at GigaOm on this subject including some examples about how to reduce churn from my experience at MySQL and Zendesk.

Having churn is like rowing a leaky boat. After a while, you spend more time bailing water than moving forward. By contrast, organizations that focus on reducing churn will find that their revenue grows every quarter.

To accurately measure what’s going on, you should begin by breaking out churn (customer cancellation) from contraction (a downgrade in spending). Measure downgrade and churn separately from upgrades and expansion; otherwise, your net growth numbers will mask problems that are bubbling below the surface. If your SaaS product has different editions (e.g. Basic, Pro, Enterprise) you should watch for downgrades that suggest customers are not seeing the value in the higher-end features.

It’s also worth paying attention to churn and contraction by customer segment. In most SaaS businesses, churn is highest in low-end customers — some of whom will inevitably be acquired or go out of business. Over time, if you move upmarket to larger SMB or Enterprise customers, low-end churn becomes less significant. Customers who spend a lot of money usually have greater commitment and resources for working through any speed bumps during implementation. They’re also far less likely to switch to another vendor with newer features.

Hopefully this article will spark some other ideas and discussions in your company. You can read the full piece at GigaOm.

There is a good article over at Re-Code by ex-Microsoft VP Steven Sinofsky called "The Four Stages of Disruption". It describes the evolution of products and markets through disruption, drawing from Sinofsky's own insights and also building on the work of Everett Rogers ("The Diffusion of Innovations") and Clayton Christensen ("The Innovator's Dilemma.") There are few software industry execs with as much experience in shipping billion dollar software products as Sinofsky. And he understands how brutal it can be to manage large teams. In my view, Sinofsky is always worth reading, though he can be a bit, ah, verbose at times.

There are dozens of examples of disruptive technologies and products. And the reactions (or inactions) of incumbents are legendary. One example that illustrates this point would be the introduction of the “PC as a server.” This has all of the hallmarks of disruption. The first customers to begin to use PCs as servers — for application workloads such as file sharing, or early client/server development — ran into incredible challenges relative to the mini/mainframe computing model. While new PCs were far more flexible and less expensive, they lacked the reliability, horsepower and tooling to supplant existing models. Those in the mini/mainframe world could remain comfortable observing the lack of those traits, almost dismissing PC servers as not “real servers,” while they continued on their path further distancing themselves from the capabilities of PC servers, refining their products and businesses for a growing base of customers. PCs as servers were simply toys.

At the same time, PC servers began to evolve and demonstrate richer models for application development (rich client front-ends), lower cost and scalable databases, and better economics for new application development. With the rapidly increasing demand for computing solutions to business problems, this wave of PC servers fit the bill. Soon the number of new applications written in this new way began to dwarf development on “real servers,” and the once-important servers became legacy relative to PC-based servers for those making the bet or shift. PC servers would soon begin to transition from disruption to broad adoption, but first the value proposition needed to be completed.

Sinofsky makes a number of good observations on how markets and products evolve through disruption. But there is a certain irony to reading about disruption by a Microsoft exec. Is Microsoft a disruptor or a disruptee? I'd say Microsoft has been on both sides of the disruption equation.

In the early days, Microsoft was a pioneering company that created vast new markets where none existed. If Microsoft products were not initially the best in their categories, their persistence and steady release cycles gave them the features they needed to beat competitors in just about every category in which they competed, whether operating systems, applications, or networking software. There were some notable exceptions, such as Microsoft's failure to beat Quicken in personal finance software. But in general, Microsoft was the 800 pound gorilla in the market and few were brave or foolish enough to tackle them head on.

The most clear example of Microsoft being a disruptor was it's entry into "back office" markets for server software as Sinofsky described. The "Wintel" combination of Windows server software and Intel X86 architecture had a profound effect on redefining the server market. It enabled large corporate Enterprise customers to move server workloads off expensive proprietary Unix systems for a fraction of the price. You could argue that SQL Server was not as good as Oracle or that NT was not as good as Unix, but for many users it was "good enough." And Microsoft was smart enough to add Enterprise DNA to the company to help them build this new class of software. I'm sure in some cases the incumbents saw what Microsoft was doing, but dismissed it's solution as mere "toys." And by the criteria of the incumbents that was exactly so.

In the mean time, Apple, Google, Amazon, Salesforce, Box and others have been the innovators coming up with new cloud-based offerings and products that have disrupted incumbents including Microsoft, HP, Dell and others.

So what do you make of Sinofsky's article? How is it disruptors get disrupted? Let me know in the comments.

Although I took most of the summer off, I did spend some time with various San Francisco business incubators including Heavybit (which focuses on infrastructure and tools) and Hub Ventures (focused on technology with social good). And I'm familiar with probably another half dozen incubators in the SF Bay Area where I either know people or have spoken at or attended various panels.

Of course, you would expect San Francisco to have lots ofincubators. But what's surprising to me is just how many business incubators and accelerator programs there are in North America --several hundred it seems. Not to mention numerous incubators in Europe and Asia. And each one seems to have a couple of dozen promising tech startups. While the costs of starting a company have fallen dramatically with open source, SaaS and cloud technology, I'm not sure the odds of success have risen. If anything, the low-bar to creating companies is making the early stage startup market even more competitive. Every good idea seems to spawn more than it's share of copycats and wannabe's.

While there are real benefits from the mentorship and connections you can make at a good incubator, it seems that the rush to create many tech companies has spawned some pretty lousy incubators. David Cohen of TechStars recently posted "A Horrifying Accelerator Story You'll Need to Read Twice" that tells the tale of an unnamed incubator from the perspective of a participating startup company. Short version: lots of promises, psychotic drama and bushel of lies:

A month later, we’d seen or heard from the founders of the top-billed startup exactly zero times and there had been exactly zero sessions for learning... By the end of the 4 months, their total time invested was 45 minutes with the accelerator. It was very strange given the outline for the program included a very specific syllabus with promises of luminary speakers, tech for non-tech founders, and more. None of it happened.

If you're giving up equity make sure you do your homework before choosing to go with any incubator. And in particular, speak to companies who are at or have graduated from the program and find out whether the promises of mentorship, investor connections and demo days paid off. Did they launch their product or service? Did they get funding? Are they making money? While everyone knows most startups have long odds and won't make it in the long run, it's worth remembering that it's probably also true for many of the incubators themselves.

A few years back, along with some folks at MySQL and in the open source community, we helped kick off a campaign against software patents in Europe. This was a hot topic and surprisingly, it seemed no large companies were willing to step up the fight. As a relatively young company, MySQL had a lot to lose if someone went on the attack against us using patents. While we had a very small number of patents in our portfolio (mostly through acquisitions), we help them only for defensive purposes.

It's been interesting to see some stories come out from NPR's Planet Money and This American Life shows that shed more light on software patents. The first episode was aired in 2011 and cast some well needed light on the rather murky area of software patents and a company called Intellectual Ventures that appears to have accumulated a massive war chest of patents. I've seen some of the patents and some are truly impressive. But in many cases, it's less clear how these patents benefit society.

"We're at a point in the state of intellectual property where existing patents probably cover every behavior that's happening on the Internet or our mobile phones today," says Chris Sacca, the venture capitalist. "The average Silicon Valley start-up or even medium sized company, no matter how truly innovative they are, I have no doubt that aspects of what they're doing violate patents right now. And that's what's fundamentally broken about this system right now."

The second episode, aired in 2013, went even further in disclosing the money that is being made by Intellectual Ventures through a licensee called Oasis for rather dubious claims around internet backup technology.

It's unknown how much money Oasis received from those licensing arrangements. We do know how much it wanted from Carbonite. Danielle Sheer said Oasis proposed a $20 million license fee plus a portion of revenue going forward.

Tom Ewing, an intellectual property lawyer who studies patent infringement cases, says, assuming Oasis was asking for settlements in rough proportion to the size of the company being targeted, a pretty good estimate of its total take "might be in excess of $100 million..."

Because of documents filed with the court, we now know that Intellectual Ventures, owned by Nathan Myhrvold, gets 90 percent of Oasis Research's net profit. Intellectual Ventures sold Crawford's patents to Oasis on this condition.

It's a fascinating story and illustrates just how out of control the patent system has become.

Facebook, Twitter, YouTube, Yammer, Flickr have changed the world. What started out as a way to hunt down old high school pals has revolutionized how we communicate with friends, family, and businesses.
On the business side, a few retweets, and a single offhand comment can spark a PR disaster. Papa John’s realized this when a photo of a racist comment on a receipt blew up on Twitter within minutes. Both Verizon and Bank of America had to scrap newly proposed user fees after customers waged a full-blown protest via social media. And we all know how Netflix got an earful when it sprung a new pricing structure on its customers.

The point is, in the customer service realm, where customers’ interactions with a company are now incredibly public and visible, social media has created a newly empowered “collective” customer. Customers, not companies, are controlling how customer service policies are created and implemented...

Perhaps the best way for corporations to leverage social media is to regularly solicit customer feedback through online surveys and customer satisfaction ratings. These and related inexpensive tools give you invaluable information about customer perceptions and needs. Armed with this, you can create the best solutions and staff customer service teams at times when they’re needed the most.

I wrote a guest column for GigaOm on how open source software, cloud and software as a service are helping to bring about the consumerization of IT: namely bringing simplicity where complexity reigned. I cited some examples including New Relic, Box.net and Apple.

Open source has gone a long way toward putting power back in the hands of developers, who can download, install and deploy software without having to go through any kind of convoluted sales or budget approval process. You want MySQL? You can download and install in 15 minutes, and you don’t have to talk to anyone to do it.

Software as a service (SaaS) takes this to an even broader audience, enabling employees to get the kind of lightweight, consumer, self-serve capabilities in their job without even having to run their own servers. Platforms like Amazon AWS, Heroku, Makara, RightScale and others put this same kind of SaaS power in the hands of developers...

My view: ease of use trumps a long feature list any day of the week. There are both techological reasons as well as sociological and economic reasons for why organizations are seeking greater simplicity. Part of this stems from the fact that complex enterprise applications grew beyond the ability of most organizations to successfully adopt.

Looks like Oracle is continuing to invest heavily in MySQL and the storage engine eco-system. They've announced a full MySQL Sunday at the upcoming Oracle Open World Sunday September 19, in San Francisco. Registration is only $75 which is a bargoon. I expect this will be bigger than any MySQL conference held to date. And there's also the JavaOne developer conference and the rest of the Oracle Open World show.

Ok, technically things actually start at noon, but knowing the MySQL crowd, I am sure there will be parties that go well past midnight. Helan gar!

Last week, Barnes & Noble announced they would cut the price on their wireless Nook eReader, from $259 to $199 ($149 for a new WiFi-only edition.) Many thought this was a good opportunity for the third place contender to gain market share. But within a few hours Amazon beat Barnes & Noble's price by $10, marking down the Kindle 2 to a mere $189.

The price cuts were made as manufacturers of e-readers faced a mounting threat from Apple’s iPad. Even though it is far more expensive than the e-readers, the iPad, which starts at $500, performs a range of functions with a versatile, colorful display that contrasts sharply with the static, monochrome screen of e-book readers. Apple said it sold more than two million iPads in the two months since the tablet’s introduction... Analysts had expected the prices of e-readers would gradually fall because of the natural decline in component costs and the increased profitability of e-books themselves.

The price cuts should add further momentum to what, despite incursions by the iPad, has been a growing market for dedicated e-reading devices. Amazon and its rivals are on pace to sell 6.6 million e-reading devices this year, up from 3.1 million in 2009, according to Forrester.

If Amazon, Barnes & Noble, Sony et al manage to sell 6 million eReaders this year, that would be impressive growth for a category that has been lackluster to date. Amazon has never broken out sales of it's Kindle line, but by all appearances it's the leading standalone eReader and likely has sold a couple of million units in its three year history.

In comparison, Apple has sold more than 3 million iPads in its first 80 days. And they're expanding into 9 more countries next month. Analysts are predicting that the iPad could sell between 5 and 10 million units this year, which blows Amazon's Kindle out of the water. And unlike Amazon, Apple actually makes money with it's iPad since it's costs are around $260 for the $499 entry level product and margins improve on the higher end units.

But its worth considering a few questions:

Will price cuts making any difference competing against the iPad?

Or does it just increase the burn of a money-losing business?

Why is Apple's iPad business profitable and Amazon's Kindle isn't?

If you could chose to be in either business, which would you choose?

And what does all this have to do with open source?

The key point here is that price is just one part of a disruptive strategy. No doubt, part of the success of MySQL, Red Hat, jBoss, Alfresco, Zimbra, Pentaho, Revolution Analytics et al, comes from delivering 90% of the benefit for 10% of the price of incumbents. The trick is do to do in a manner that is profitable but that incumbents cannot respond to because of their higher cost of operations. (And remember, most open source users don't pay anything!)